College is considering building a new student residence. The construction cost of a 125-room residence (excluding furniture) is $5,000,000. The College uses a 15 year planning horizon to evaluate investments of this type. The furnishings for this residence must be replaced every five years, at an estimated cost of $2,000,000 (i.e., at n=0, at n=5, and n=10). The old furniture has no salvage value. Annual operating and maintenance expenses for the new building are estimated to be $125,000. The College can sell the building after 15 years at 20% of the original construction cost.

Rooms at the residence will be rented for $45 per day. On the average the occupancy is expected to be 80% per year. Assume the residence will operate 300 days per year. MARR = 10%

INSTRUCTIONS

1. Ignoring both income and disposal taxes, use Excel to calculate the Annual Worth, to determine if the project is economically feasible. (10 marks)
2. Determine the project's break-even points, for the following two factors, considering each one separately. (i.e., calculate the percentage change in each of the following two factors, considered one at a time, that would cause the project NPV to become zero).Hint:Consider using Goal Seek
   • Initial Capital Investment; i.e., building cost only. (5 marks)
   • Occupancy rate; i.e., the average percent of rented rooms per year. (5 marks)
3. Prepare a table showing the project's Annual Worth, corresponding to changes in each of the two factors specified above, over an interval of plus/minus 20% for each factor from a base of 0%. (5 marks)
4. What can you conclude from the analysis? i.e., which of the two factors is the project profitability more sensitive to? Why? (5 marks)